Orange County bankers are facing higher fees from the Federal Deposit Insurance Corp. on several fronts.
In the past year, the FDIC has increased quarterly fees charged to banks, collected a special assessment based on assets and proposed that banks prepay fees for 2010, 2011 and 2012 by year’s end.
The moves are designed to replenish the FDIC’s fund that insures deposits at banks. The fund has been depleted this year as bank failures have outpaced fees coming in from banks, which finance the fund.
The FDIC is expected to adopt the prepayment proposal this month after a public hearing on the measure ended in late October.
Already, higher FDIC fees are having an impact on local banks.
Last month, Costa Mesa-based bank operator Pacific Premier Bancorp reported a third-quarter loss, largely due to higher FDIC fees.
Pacific Premier lost $7,000 in the quarter, versus a profit of $1 million a year earlier.
The bank has five branches in OC and one in San Bernardino. Pacific Premier, which focuses on loans and accounts for businesses, had assets of $848 million as of Sept. 30.
Other banks are bracing for higher fees.
Costa Mesa-based Commercial Bank of California projects to pay more than $2 million if the prepayment proposal goes through as expected, according to Chief Executive Bala Balkrishna.
Prepayment Problems
That would be on top of the $125,000 that the bank paid in September when the FDIC collected a special assessment on banks.
The higher fees come at a tough time for local banks. They’re struggling with declining profits as they set aside more money to cushion against loans going bad and make fewer loans as businesses pull back during the downturn.
Balkrishna said he doesn’t see the higher FDIC fees hampering Commercial Bank of California’s lending. But he called the prepayment plan a subsidy of weak banks by strong ones.
He said he would have preferred an alternative proposal that would have seen the FDIC borrow from the Treasury Department to shore up its insurance fund.
“Every other industry is being bailed out through the Treasury so why not do that for this industry?” Balkrishna said.
Ivo Tjan, chief executive of Com-merceWest Bank NA in Irvine, said he’s concerned about whether the prepayment plan will fall short, leading to another round of fees on banks.
“I’m not trying to be pessimistic. I’m not trying to be optimistic. I’m trying to be realistic,” Tjan said.
His bank, which offers loans, accounts and credit cards for businesses, paid about $200,000 for the FDIC’s special assessment in September.
While some bankers have concerns about the fees—and others likely are grumbling in private—most back the prepayment proposal.
“I think it’s the best choice out of a lot of unpalatable choices out there,” said Steven Gardner, chief executive of Pacific Premier. “It’s the least worst choice out there.”
Lesser of Evils
Glenn Gray, chief executive of Tustin-based Sunwest Bank, said he prefers the plan as the “lesser of two evils” versus borrowing from the Treasury Department.
“I think we’re all pretty sick and tired of bailouts,” Gray said. “I’d rather us do that and be self-funding as an industry than the alternative.”
If the FDIC doesn’t collect prepayments or go to the Treasury, banks likely would see more one-time assessments on top of their regular payments.
“I think it’s in everyone’s interest to get this in place,” said Andrew Gray, a FDIC spokesman. “We’ve been pretty clear that this is the way that we’ll likely move forward. It strikes a good balance among some difficult choices.”
Banks will get a break on how they account for prepayments. Under the proposal, banks would record prepayments as assets on their balance sheets as of Dec. 30.
From Dec. 31 on, banks would record a quarterly expense for their assessments and an offsetting credit for their prepaid assessment until the asset is exhausted.
The plan won’t affect Pacific Premier Bank’s income statement, according to Gardner, as those are fees the bank would have to pay in the future anyway.
“It’s more of a liquidity issue, ‘Do you have the cash on hand?’” he said. “We have more than ample liquidity.”
Some banks could get an exemption from the prepayment plan if the FDIC determines the payment would adversely affect the safety and soundness of a bank.
Banks also can apply for an exemption from the prepayment requirement.
Some bankers said the FDIC should consider charging regularly scheduled assessments based on bank assets rather than deposits, as it does now.
The special assessment that was charged in September was based on assets.
Determining fees on assets shifts the burden to larger banks, which have much greater assets and a smaller percentage of deposits, bankers said.
The FDIC’s Gray said since the prepayment is based on a regular assessment, the agency would have less discretion in its ability to change what it is based on.
A final decision on the proposal could come later this month, he said.
Shvartsman is a freelance writer based in Santa Ana.
